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Trump delivers game-changing week for markets

The post-election rally that has reshaped global financial markets cooled off Friday, at the end of a week in which investors quickly adjusted to a president-elect who has promised to step up government spending and slash business regulation.

The S&P 500 dipped 0.1 per cent on Friday in New York, while the Eurofirst 300 fell 0.6 per cent, paring back this week’s gains.

The rapid change in sentiment following Donald Trump’s election has led a shakeout across nearly all financial markets with old-school industrials rallying in anticipation of infrastructure spending; tech stocks selling off amid fears of trade wars hitting their Asian supply chains; and US Treasuries plummeting in anticipation of heightened government debt.

By the end of Thursday, the Bloomberg Barclays Multiverse index — one of the biggest bond market gauges with over $49tn of debt — had slumped 2.3 per cent, making this the worst week for global fixed income since the peak of the “taper tantrum” in June 2013. Even before Friday’s sell-off in Europe, $1.1tn had been sliced off global bond markets this week.

The US bond market was closed for Veterans Day on Friday, but the sovereign debt rout continued unabated in Europe and Asia; when the final toll is counted, the week as a whole could be the worst since February 1999.

“It’s a tectonic shift,” said Henry Kaufman, the former Salomon Brothers chief economist and the first analyst dubbed “Dr Doom” for correctly calling the last bond bear market in the 1970s.

Mr Kaufman now predicts the end of a three-decade bond bull market, given the likelihood of unfunded tax cuts, infrastructure spending and a radically reshaped Federal Reserve under the incoming president Trump.

“I would say the secular trend is going to be upwards now,” he told the FT. “Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over, and we are about to have a gentle swing upwards.”

With investors starting to bet on accelerating inflation and surging federal deficits, the Federal Reserve signalled on Friday it is preparing to lift interest rates in December. Some analysts thought market volatility on election night might prompt the Fed to hold fire next month, but Stanley Fischer, the vice-chair of the Federal Reserve Board, said the case for gradual rate rises is “quite strong”.

Investors pumped more than $5bn into US equity funds over the past week, targeting healthcare and financial companies, while emerging market stock funds recorded their second consecutive weekly outflow, the first time that has happened since June.

“Expectations of decreased regulation, favourable tax reform, increased fiscal spending and less congressional gridlock should drive stronger revenue growth and higher net income margins,” said JPMorgan strategists Marko Kolanovic and Dubravko Lakos.

But the impact of Mr Trump’s election has been felt well beyond American shores, particularly in emerging markets that risk the fallout of Donald Trump pursuing a protectionist trade policy.

The peso plumbed another record low on Friday. JPMorgan’s emerging market currency index was set for its worst weekly losses in three years.

Protectionism risk is a big weight on emerging market currencies, said Steven Englander, head of FX strategy at Citigroup.

“To work well for EM FX, you need Trump to say, ‘We love everyone, we want to sit down and go over these trade treaties and make them beneficial for everybody involved’, then some of the pressures on EM will abate.’’

In a shift from the relationship in recent years between demand for raw materials and the prospects for developing nations, emerging markets have suffered at a time when commodity prices have risen. Iron ore traded at its highest price in more than two years on Friday.

Even if the president-elect did push his protectionist rhetoric to one side, he is more likely to pursue a Reagan-style policy mix of fiscal stimulus and monetary tightening, Mr Englander added, “and the impact on rates will be dollar-positive across the board”.

Also in the trade spotlight were US technology companies that rely on global supply chains, with the shares of leading tech giants notably lagging the rally in US equities that pushed the Dow Jones Industrial Average to a record high. US equities were set to open lower on Friday as European share markets were modestly weaker.

Expectations of a stronger US economy and higher inflationary pressures propelled Treasury bond yields sharply higher, with the 10-year yield climbing from a low of 1.71 per cent on Wednesday morning to end at 2.15 per cent on Thursday, with the market closed for Veterans Day on Friday.

Broadly the markets have taken the view that Trump’s win means fiscal stimulus and reflation, said Frederik Ducrozet, senior economist at Pictet Wealth Management. “But longer term, protectionism could have a huge impact on growth potential for US trade partners in the world, in particular emerging markets. Once Trump makes his first decisions on trade next year you can expect to see the impact start to really hit in 2018.”

Additional reporting by Sam Fleming in Washington DC and Eric Platt in New York.

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